The concept of an LEI, or Legal Entity Identifier, has been implemented on a global scale. The Global Legal Entity Identifier System (or “GLEIS”) was proposed by international regulatory authorities as a means of dealing with the worldwide financial problems. The LEI was developed to lessen the burden of establishing contact with all parties involved in a financial transaction. Under LEI, a global reference data system is built, which provides a unique identifier for every legal entity involved in a financial transaction across borders.
1. Define an LEI and provide some examples
The 20-digit reference number known as the Legal Entity Identifier uniquely identifies any legal business or structure that is a party to a financial transaction in any nation (LEI).
A Legal Entity Identifier (LEI) may be assigned to any legitimate business that conducts financial operations, such as a bank, mutual fund, partnership, trust, holding, special purpose vehicle, asset management company, or other business. The Legal Entity Identifier (LEI) will simplify the process of recording financial transactions in central databases.
The LEI is a 20-digit number, the first four of which reflect the Local Operating Unit (“LOU”) Identity. For instance, the company authorised to generate globally compatible LEIs is LOU 3358, which stands for Legal Entity Identifier India Ltd. Zeros are assigned to the following two numbers since they are reserved. In compliance with fair and ethical allocation norms, the LOU has assigned the following 12 digits as an alphanumeric identifier. The last two digits are calculated check digits required by ISO 17442.
Second, the use of the LEI in India
The LEI concept has being slowly disseminated by RBI throughout India. Rupee Interest Rate futures, foreign currency derivatives, etc. are traded on the Over-the-Counter (“OTC”) market, where LEI was first adopted for all participants. Companies lacking LEIs were unable to trade on the OTC Derivatives market. Throughout time, LEI was mandated by the following groups:
The Reserve Bank of India demanded LEI from all Indian bank borrowers. RBI mandated LEI for the non-derivative market, which includes the money market, non-derivative FX market, and government securities markets, and prohibited the renewal or enhancement of credit facilities to firms without an LEI code. Foreign companies operating in the commodities derivatives market are required to get an LEI from SEBI.
The RBI demanded the LEI for any monetary transactions of 50 billion rupees or more conducted through Real Time Gross Settlement (RTGS) or National Electronic Funds Transfer (NEFT).
The RBI has extended LEI to include large-scale international transactions of or more in capital or current account. The deadline for applying for LEI Numbers is October 1, 2022. This study provides a comprehensive analysis of how LEI might be used in international business dealings.
Just how do International Deals Operate?
When the payee and the recipient are located in separate countries, the transaction is said to cross borders. It’s possible for individuals, companies, or banks to engage in international financial transactions.
The Creation of a Unique Identifying Number for Use in Foreign Commercial Transactions
The 10th December 2021 Notification No. RBI/2021-22/137 A.P. (DIR Series Circular No. 20) mandated the use of a Legal Entity Identification for International Transactions.
Starting on October 1, 2022, AD Category I banks will need the LEI number from resident entities (non-individuals) doing capital or current account transactions of 50 crore or more (per transaction) under FEMA, 1999.
AD Category I banks may nevertheless process the transactions despite the lack of LEI data, provided they take into consideration non-resident counterparts and international entities.
AD Category I banks may also encourage relevant parties to voluntarily disclose LEI during transactions prior to October 1, 2022.
After obtaining an LEI number, an organisation must always provide that number while doing business, no matter how little.
AD Category-I institutions are required to utilise the Global Legal Entity Identifier Foundation’s online LEI database to check and gather correct LEI information for all connected transactions (GLEIF).
If AD banks feel this circular applies to their customers, they may inform their customers of this. They may also recommend that businesses that engage in high-value transactions (those worth more than 50 crores) under FEMA get an LEI as soon as feasible.
Method 5: Acquiring an LEI LEIs are issued by Local Operating Units that have been approved by the Global Legal Entity Identifier Foundation (GLEIF). The Global LEI Facilitation Group (GLEIF) is an organisation that works to spread the usage of LEI.
In India, LEIs may be issued by the Legal Entity Identifier India Ltd (“LEIL”), which acts as the country’s Local Operational Unit.
Every business that need an LEI may apply for one at https://www.ccilindia-lei.co.in/. In “Rules, Questions & Documents,” you may find the LEI request form and the User Guide.
After the issuance of an LEI, what steps should be taken?
The LEI number must be included in all of the entity’s transactions from the moment it is assigned, regardless of the amount of the transaction.
The Global Legal Entity Identifier Foundation maintains a worldwide database of LEIs, which the affected AD Category I institutions must record properly and verify against (or “GLEIF”).
The remitter and beneficiary LEI information must be included in all payments of 50 crore INR or more made by an entity (a non-person). The use of LEI reporting is mandatory for NEFT and RTGS transactions.
When the sender and the receiver of a customer transaction are both humans, an LEI is not required. Whenever a business or organisation is involved in a deal, LEI is required.
How will the use of LEIs in international trade affect current practices ?
LEI has the potential to be an instrumental tool in avoiding financial contagion and maintaining financial stability by aiding in the evaluation of systemic risks and the implementation of remedial measures. Each LEI includes details on the entity’s ownership structure, answering queries like “who is who?” and “who owns who?” Hence, the publicly available LEI data pool may be seen as a global directory, greatly enhancing transparency in international trade. RBI shows it is cautious and has planned the introduction of LEI carefully by introducing it progressively to avoid controversy and confusion. More foreign investment into Indian markets is expected as a result of LEI’s increased openness, which is also expected to make doing business simpler.
